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Payroll tax cut is back

By Kay Bell · Bankrate.com
Friday, February 17, 2012
Posted: 2 pm ET

After months of wrangling, the payroll tax cut extension fight came to a quick -- and positive for workers -- end on Friday.

Both the House and Senate signed off on keeping in place through 2012 the 2 percentage point reduction in the amount taken out of workers' paychecks to pay for Social Security.

The turnaround came after House Republicans dropped demands that pay for the payroll tax cut be paid for by $100 billion in spending cuts. It initially looked as if the payroll tax break portion would be dealt with separately, but lawmakers quickly came to an agreement on how to pay for the remaining $50 billion necessary to keep unemployment benefits in place and ensure that doctors didn't receive substantially less reimbursement for treating Medicare patients.

Sure, not everyone is happy with the deal.

Legislators on both sides of the political aisle are upset that the payroll tax cut takes money away from a Social Security system that they believe already is on shaky financial footing.

Republicans also opposed the deal, arguing that the tax cut does little to spur the economy.

And one of the top members of the House Democratic leadership broke ranks and voted against the bill. Steny Hoyer, who as whip for Democrats is charged with mobilizing his party's vote on important legislation, opposed the portion of the bill that cuts retirement funds for some federal workers.

I totally understand Hoyer's  position. I used to lived in his suburban Maryland Congressional district, where many of my neighbors were government employees.

Lucky for the Democrats and workers anxiously awaiting this vote, the House didn't really need Hoyer's support.

The measure easily passed the House by a 293-to-132 vote. Soon thereafter, the Senate approved it 60 to 36. The president is expected to shortly sign it into law.

So you now can ignore my earlier warning about not spending the tax cut money until a deal is done. Our long national payroll tax cut nightmare is finally over ... at least through 2012.

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2 Comments
SD
February 20, 2012 at 12:34 pm

Jeffrey, let me clarify a few things:

1. The way SS works, it was previously funded by a 6.2% contribution from your employer, and a 6.2% contribution from our paychecks. In normal circumstances, $0 ever come from the federal budget; SS is supposed to be funded by contributions independent of taxes. What the tax cut did is have the employer still contributes 6.2%, you and I contribute 4.2%, and the government is paying the additional 2%. So, we still get the effective contribution rate, which would not reduce our expected payout from SS at retirement, only the funding changed.

2. Since the government is paying the 2%, that has to come from the budget. So the SS is now indirectly linked to taxes. But as you've also finally discovered, BY LAW, whatever surplus funds SS receives in a given year (payroll deductions minus SS payouts for that year) has to be transferred to the general treasury with equivalent treasury bonds. And treasury interest is a budget expense, so again, SS is indirectly linked to the budget, which is funded by taxes. This is a rough deal for taxpayers because the paltry interest from treasury bonds does not really earn a market return, and much like the fed's buying of treasuries, depresses the true demand for U.S. debt, which further keeps the cost of borrowing for the U.S. low (which is the only positive, though short-term).

Jeffrey Truthseeker
February 18, 2012 at 4:04 am

Even though I tend to lean left in the political spectrum, I am very suspicious of this bill. First of all, most Americans are ignorant to the real details of the bills that Congress passes, and the reason for that is that the news media fails to educate the public in an objective and clear way without all of the clutter and hype from the lobbyists, I mean the news commentators, on tv. But one could learn something just by carefully looking at the language that the big corporate run news programs have been using to describe this tax cut. Perhaps I just wasn't paying close enough attention to this issue, but I do not recall the news commentators and news anchors use the phrase "Social Security Pay Roll Tax Cut. I have been hearing about the payroll tax cut all the time in the news for the past couple of months, but no matter what I hear, I always end up thinking that this is a good thing because it allows workers to have a bigger paycheck. And this is a good example of the power of the media, especially on television. But luckily I get information from other news sources, and just yesterday I learned that this payroll tax is the money that directly and solely funds Social Security. And I also just learned that the funding of this Social Security tax cut (which is what it should be referred to as) comes from the general revenue when people and businesses pay their taxes. And so, this means that the tax cut is paid by a tax. Is this right or am I missing something? And because many corporations are tax exempt or pay lower taxes than the individual, it is in fact the individual workers that are paying for this payroll tax cut, and not only are the workers paying for their own tax cut, they are also paying for some of the employers tax cut. And another thing that I just learned is that there is a 2.6 trillion dollar surplus in Social Security, and we are allowing Congress to use this surplus money to pay for other items in the budget in return for govt securities of the same amount which will in turn be paid for by taxpayers. That sounds crazy to me. Why don't we keep the 2.6 trillion dollars in some kind of huge investment fund so that the money can fester and grow instead of just passing the burden on to the next generation. And I really haven't paying too much attention to the politics of this issue; and so, who do I sound more like -- a Republican or a Democrat? It would be funny to me because I consider myself a Progressive Independent. Perhaps we should outlaw the use of all political terms that labels how a person thinks when describing a piece of legislation so that we can look at each issue in a cleaner and much more objective way.